China’s official factory PMI fell to 50.1 in July, still in expansion territory but at an eight-month low, from 50.2 in June and against analyst expectations of 50.3 according to a Reuters survey.
Only one of the index’s 11 components, the output, was still in the above-50 expansion territory, with the rest contracting.
“The PMI is a weak number. I think the market is disappointed at these numbers,” Bin Gao, China rates strategist at Bank of America Merrill Lynch, told Emerging Markets.
However, Gao said the PMI’s employment component – which fell slightly to 49.5 from June’s 49.7 – did not show a dire contraction as was the case during the 2008 financial crisis so the government was unlikely to act.
“We don’t expect the government to become panicked or to roll out a stimulus package in the near term because the employment situation is not that bad,” Gao added.
In contrast with the official figures, the final HSBC China Manufacturing PMI - also released on Wednesday and compiled together with Markit - was in contraction territory but offered more hope on the recovery.
The HSBC Purchasing Managers’ Index came in at 49.3 in July, up from June’s 48.2, the largest month-on-month increase in 21 months.
NEW BUSINESS, EXPORTS DOWN
The index showed that manufacturing production rose during July, ending four months of contraction but the rate of expansion was marginal.
HSBC and Markit’s July survey signaled another decline in the volume of new business and in new export business, but the pace of the reduction was slower.
Over the past months, China’s official PMI figure has consistently shown expansion and has been higher than HSBC’s.
Fitch ratings agency commented that the official figure “reflects positive returns from large state-owned enterprises in particular, whereas the HSBC index covers only private sector entities excluding the large number of public sector entities.”
“The divergence of the indicators may reflect differential terms of access to credit, with the contracting HSBC index representing the tighter credit conditions for private companies whereas the expanding official index reflects China’s large state-owned entities, which enjoy support for growth and expansion and have easier access to funding,” the ratings agency said on its website.
HSBC’s flash PMI figures released last week showed the employment index at a 40-month low and the final data confirmed the quickening pace of the job-shedding.
According to HSBC, manufacturers cited employee retirements, company downsizing and streamlining the workforce as new orders fell among the reasons for cutting jobs.
PBOC’S NEXT MOVE
Hongbin Qu, Chief Economist for China at HSBC, said the “modest improvement” in manufacturing conditions was due to the initial effect of earlier easing measures.
The People’s Bank of China (PBOC) cut banks’ reserve requirement ratio three times since November last year and has reduced interest rates twice to avoid a hard landing of the economy because of the slowdown in the eurozone and the U.S.
“China’s growth slowdown has not been reversed meaningfully and downside pressures persist with external markets continuing to deteriorate,” Qu wrote in a press release accompanying the data. “We still expect Beijing to step up policy easing in the coming months to support growth and employment.”
Capital Economics China economist Qinwei Wang said price rises were under control, with consumer price inflation expected to have fallen slightly last month, which would give the PBOC room to act to stimulate the economy further.
“Overall, we anticipate inflation will be roughly stable in August before picking up to reach just over 3 percent by end-year,” Wang wrote in a market note. “Policymakers should feel no barrier to further policy easing to support the economy at these inflation levels.”
The PBOC should take advantage of the taming of inflation to press ahead with easing measures, Gao also said.
“There’s a need for the PBOC to lower the reserve requirement ratio (RRR) because liquidity has not been very good in the last couple of months,” he said. “We have been expecting the PBOC to cut RRR last month but instead it used reverse repos to boost liquidity.”
“For this month inflation will be low ... we can argue that PBOC has the room to cut interest rates one, even two more times,” Gao said.